Standing Committee A

[David Taylor in the Chair]

Companies (Audit, Investigations and Community Enterprise) Bill [Lords]

Clause 1 ordered to stand part of the Bill.

Clause 2 - Arrangements to which additional

Andrew Mitchell: I beg to move amendment No. 4, in
clause 2, page 3, line 32, after 'of', insert 'qualifying companies'.

David Taylor: With this it will be convenient to discuss the following amendments: No. 5, in
clause 2, page 3, line 33, leave out paragraphs (a) and (b).
 No. 7, in 
clause 2, page 3, line 33, leave out from 'securities' to 'or' in line 36 and insert 
 'are a constituent of the FTSE-Actuaries 350 share index'.
 No. 6, in 
clause 2, page 3, line 38, at end insert— 
 '(3) Regulations may provide for what companies are qualifying companies both generally by description and, if the Secretary of State considers that there is a major public interest in the financial condition of a specified company, by reference to such specified company.'.

Andrew Mitchell: May I welcome you to the Chair, Mr. Taylor? We made a significant start this morning under your co-Chairman Mr. Conway. Although I was dismayed that none of the galaxy of proposals that I presented to the Minister found immediate favour with her, I sensed a willingness to look further at the terms of at least one of them. So, with a spirit of hope, I turn to the first of the four issues that, according to the order of consideration, we can discuss in detail this afternoon.
 The purpose of the amendments is to alter the definition of a major audit. Major audits—in other words, those that call for independent monitoring—are those of listed companies and of companies chosen by the supervisory body as being of public interest. The amendments would empower the Secretary of State to make regulations on which company audits were major audits. In the spirit of generosity that characterised this morning's sitting, I have also tabled amendment No. 7, thereby giving the Government a choice—we are, after all, the party of choice—on which amendment to accept. 
 Whenever legislation imposes a new burden on industry, and however urgent the problem that the legislation is designed to tackle, it is essential that the most careful consideration be given to whether the burden is minimised. Alas, the proposals in the Bill, which provide for independent monitoring of audits of 
 major companies, show no sign whatever of such careful consideration. 
 On Second Reading, I drew the House's attention to Anatole Kaletsky's series of articles on the burdens that British business and industry face and pointed out that thanks to a number of reforms—carried out by the last Conservative Government and by this Government—British businesses have done well compared with other European countries' businesses. However, although high tax was previously the major danger to British prosperity, it is now the high level of regulation. It is in that spirit that I consider the clause and propose the amendment. 
 We accept that there is a case for independent monitoring of certain more significant company audits. We agree with the Government that the relevant supervisory body should have responsibility for ensuring that its rules provide for such independent monitoring. At present, the proposal is that that independent monitoring should be a necessity in the case of major audits, by which is meant, according to the Bill, audits of listed companies and certain other companies 
''in whose financial condition there is a major public interest.''
 On this side of the Committee, we have concerns with both legs of the proposed definition of a major audit. We understand from the proposals that the Government accept that independent monitoring should be a requirement only in the case of larger companies or companies of some public importance. How, then, has the limitation to listed companies been chosen? On the simplistic basis expressed by Lord Evans of Temple Guiting in the Grand Committee, it appears: 
''Audits of listed companies are, by nature of their listing, considered to be major.''—[Official Report, House of Lords, 16 March 2004; Vol. 659, c. GC29.]
 I hope that that was not the thinking. If it was, I can say only that industry deserves that greater analysis and thought be applied in the preparation of such legislation. 
 There are some 1,200 listed companies, in many of which significant public involvement is limited. The mere fact that a company is listed is not enough to justify the imposition of further and additional regulation. Such an additional burden can be justified only where there is a real and significant public interest, not a notional one. 
 There are two main considerations. First, general investors should be able to have confidence in the audits of the companies in which they invest. Secondly, the economy as a whole should not be at risk from damage caused by a major corporate failure. Those are the two key issues; both call for added regulation to affect only the larger and more significant companies. 
 With regard to the first consideration, it is undoubtedly the case that the vast bulk of investment lies in a relatively small proportion of listed companies. That small number contains the large companies that make up the vast bulk of the market in value terms. It might be added that the investors in the smaller listed companies tend to be the 
 professional, more experienced investors, who are usually well able to look after themselves. 
 As regards the second consideration, it is obvious that there is no great public interest or concern with small companies. The risk to the economy from the failure of companies with a market capitalisation of just a few hundred million pounds is small. It seems to Conservative Members that there is no great imperative for the independent monitoring of the audits of smaller companies, even if they are listed. Why are the Government proposing to impose on industry the cost of such independent monitoring? I hope the Minister will explain in detail or agree to my amendment. 
 The amendments would empower the Secretary of State to set out in regulations a more sensible and realistic benchmark for the independent monitoring requirement than the mere fact of being listed. The proposed listing benchmark has the merit of certainty and clarity, which we acknowledge, but it catches unnecessarily small fish in its net. If we allowed regulations to set the benchmark, the net's mesh could be set more carefully. In particular, there would be the merit of flexibility. The size of the mesh could be changed without the necessity of primary legislation. 
 Our initial suggestion is that the benchmark could be membership of the FTSE 350, or a similar index, at the beginning of the company's relevant accounting period. That would get round a fact that sharper-eyed members of the Committee may have already worked out: the composition of the FTSE 350 tends to change during the course of the year. Such a provision would catch some 96 per cent. of the whole market capitalisation, but would also release from the burden of the new measures some 700 or 800 companies. It would also significantly reduce the overall cost of the exercise. 
 The second limb of the Government's definition of major audit refers to 
''a company in whose financial condition there is a major public interest.''
 Again, we do not challenge the principle behind the proposal. Important companies may fall outside any general benchmarks set in regulations. Who, however, is to decide which those companies are, and how? It appears that it will be some supervisory body, but is it the role of such bodies to decide where a major public interest exists? Has anyone asked the existing supervisory bodies whether they feel qualified to decide such a question? Will the Minister enlighten us on that point? 
 What is more, what happens if a company wants to dispute a designation that its audit is a ''major audit''? Surely it is fair that it should be entitled to do so. Is it really the job of a body such as the Institute of Chartered Accountants in England and Wales to hold hearings on whether a major public interest exists? Indeed, there may be another problem if there is more than one supervisory body. Two such bodies might reach different conclusions on such a question of public interest. That would be undesirable in principle 
 and might even lead to auditors preferring one supervisory body to another, or a company preferring one auditor to another merely because of its regulator. 
 Our proposal is that the body that decides whether a company's audit is a major audit on public interest grounds should be the party that is entrusted in this country, subject to the supervision of the courts, with the task of identifying where the public interest lies—namely, the Government. Our proposals to amend clause 2 would ensure that attention and resources are focused on areas in which an audit failure is likely to have the most significant adverse effects on the economy and the public. They would do that while minimising the burden on industry, which the Opposition regard as extremely important.

Jacqui Smith: Welcome to the Chair, Mr. Taylor. We had a stimulating debate this morning, and I hope that we will continue in that vein this afternoon. It is certainly a pleasure to serve under your chairmanship for the first time.
 We dealt with the new clauses this morning, and now move to the part of the Bill that aims specifically at improving the independence of standard-setting, monitoring and disciplinary arrangements, especially for audit. This is very much at the heart of what we have described as a post-Enron Bill and of what will be necessary to ensure, as I suggested on Second Reading, that we can all continue to have trust—whether as consumers, investors or suppliers—in corporate Britain. That trust is, after all, so important for the wealth-producing activities for which those businesses are responsible. 
 Our actions are the result of considerable discussion with stakeholders and a considerable amount of review of the position on auditing and accountancy in particular. When we reviewed the regulation of the auditing and accountancy professions in late 2002, we found no evidence that the UK's regulatory system was fundamentally flawed, but we did discover concerns about the perceived independence of key aspects of the system. We therefore concluded that independent regulation and review of audit should be strengthened. That, of course, came on top of other actions—some of which are non-legislative, some of which are in the Bill—to improve the position on audit in this post-Enron era. 
 We touched on some of those actions on Second Reading, but to set the context for this part of the Bill, it is worth reminding members of the Committee that so far as the non-legislative measures to improve audit are concerned we have already seen the development of much tougher ethical standards on auditor independence and objectivity, and more frequent rotation of audit partners, which is now every five years. 
 We are also seeing a longer cooling-off period before an auditor can be employed by a client. Those developments demonstrate the emphasis on ensuring the suitable distinction between the audit activity and the business being audited. We have also seen a focus 
 in audit firms on greater transparency in their annual accounts, and we have considered the measure from the point of view of the company requesting the audit, with a much stronger role for a company's audit committee, formalised in a revised, combined code. 
 On top of that, the Financial Reporting Council has been restructured and strengthened. It will be at the centre of the independent elements of standard setting, monitoring and investigation and discipline to which the proposals relate. In particular, responsibility for fulfilling the requirements will be transferred to it. Further, there is the action that I shall mention shortly in relation to clauses 1 and 2. 
 Later in the Bill, in clause 7, there is the power to require companies to publish more information about the services that they receive from their auditors. In clause 8, there is a stronger power for auditors to require information and explanations from a wider group of people, while in clause 9 there is provision for a statement in a directors' report on the disclosure of information to auditors. 
 Having concluded that there was no fundamental problem in the regulatory regime, we were clear that there was a need to improve the independence of key aspects of the system. The provisions of clauses 1 and 2, and those that the hon. Member for Sutton Coldfield (Mr. Mitchell) is attacking with his amendments, are part of the action necessary to ensure that independence. The position is that, subject to the provisions of clauses 1 and 2, for a professional accountancy body to be recognised as a supervisory body for auditors, it must comply with the requirements of schedule 11 to the Companies Act 1989. Those requirements cover both the rules that the body must have in place on people's eligibility to be company auditors and the conduct of company audit work. 
 Clause 1 inserts additional requirements in schedule 11. It requires recognised supervisory bodies to participate in independent arrangements, demonstrating the Bill's emphasis on independence. It also sets audit standards in relation to both technical and ethical matters that relate to the integrity and independence of auditors—covered by the functions of the Auditing Practices Board—and, touching on the amendments, to the monitoring of audits of listed and other major companies, as well as to independent arrangements for investigating and disciplining auditors in relation to public interest cases. 
 The additional requirements introduced by the clauses represent an important strengthening of the independence of the regulatory regime for auditors, especially in the areas in which an audit failure is likely to have the most significant adverse impact on the economy. The result will be stronger, more independent and more effective regulation. 
 Clause 2 in particular describes the key features of the arrangements in which supervisory bodies for auditors must participate to satisfy the new requirements for recognition introduced in clause 1. Those supervisory bodies include the ICAEW, the Institute of Chartered Accountants of Scotland, which the hon. Member for Tweeddale, Ettrick and 
 Lauderdale (Mr. Moore) referred to earlier, and other recognised supervisory bodies, which have been responsible for some functions which, under clauses 1 and 2, will be the responsibility of the independently-acting Financial Reporting Council. 
 One of the main purposes of clause 2 is to make the arrangements operationally independent of the supervisory bodies. Clause 2 provides that all the arrangements—the setting of technical audit standards, and standards relating to professional integrity and independence; the monitoring of audits of listed and other major companies; and the investigation and disciplining of auditors in public interest cases—operate independently of the supervisory bodies. Those bodies must not be involved in selecting or appointing the people who carry out the standard setting, monitoring, investigation and discipline that have been described, and of course they cannot be involved in carrying out any of those functions. 
 Clause 2 also provides that the arrangements must be funded—that where the arrangements provide that the bodies fund them, that will be a condition of recognition. That is another important way of ensuring the independence of the arrangements. It prevents the bodies in question from influencing the arrangements by withholding the necessary funding. 
 Clause 2, together with clause 1, strengthens in key respects the regulation of audit. The hon. Member for Sutton Coldfield majored in what he considers potential burdens—although I argue that those things are not burdensome—but he failed to recognise the significance of independence in the new arrangements. The provisions that allow for independence operate simply and efficiently, building on the existing regulatory framework, which is highly regarded. They have an important function—rebuilding confidence in the reliability of financial information provided by companies after the collapse of Enron and of WorldCom. It is essential to do this if the UK is to benefit from a regulatory regime that is recognised internationally as world class. 
 The amendments to which the hon. Gentleman spoke focus in particular on the independent monitoring function that is now to be vested in the audit investigation unit in the FRC. As he pointed out, amendments Nos. 4, 5 and 6 would give the Secretary of State the power to define what companies should fall within the scope of independent monitoring. Amendment No. 7 would limit the required minimum scope of the independent monitoring arrangements to the audit of FTSE 350 companies. 
 The hon. Gentleman, as he did this morning, claims that his amendments are helpful, but to me they suggest a lack of recognition of the significance of the independent monitoring of audits and/or a misunderstanding of how the function will be carried out. I hope I can reassure him that his amendments are both misguided and unnecessary. 
 The hon. Gentleman made significant play of the idea of additional burdens being placed on companies. I do not consider that the requirement for independent monitoring will result in additional burdens on 
 business. The companies themselves should not be affected. The monitoring will be of not the companies that are being audited, but the audit function—the quality of the auditing of the companies. Monitoring is focused on the audit firm and the quality of the audits it has carried out.

Andrew Mitchell: I am mortified by the Minister's description of my amendments, but has she not in her last few sentences put her finger on precisely the point? The provision is a burden on business; it is a cost for business to bear, and the issue is whether that is proportionate to the risk. That is why—in amendment No. 7, for example—I have sought substantially to narrow the number of companies. As a result, larger companies, whose importance is greater than the individual company, would be caught in the net, while smaller companies, where the risk to the broader sector is much less, would be excluded. Her proposal is undoubtedly a burden on business; the issue between us is whether it is justified.

Jacqui Smith: The issue is certainly whether the proposal is justified, but it is also whether there will be additional monitoring, over and above that which exists. Auditors are subject to direct monitoring by their supervisory body, but those arrangements will be largely replaced, and major audits will be monitored by means of the independent arrangements put in place in the Bill. The important point is that although the activity will be similar, it will be carried out independently of the supervisory body. That will introduce an important element of independence to the system, and the new monitoring arrangements will provide a more focused and challenging regime for auditors.
 The recognised supervisory bodies are already required by statute to have effective monitoring arrangements. Clauses 1 and 2 change who is required to carry out certain monitoring functions, specifying an independent body instead of the supervisory bodies. As those bodies are already required to have adequate monitoring arrangements, the provisions should not, in practice, impose significant additional burdens on them or on businesses—the audit firms, not the companies that were audited in the first place. 
 The new audit inspection unit of the FRC, which will carry out the monitoring function, has been working closely with the recognised supervisory bodies to ensure that the new independent monitoring arrangements and the bodies' own monitoring arrangements operate seamlessly. Where an audit firm is subject to monitoring by a supervisory body and the AIU, we envisage those organisations working together, making joint visits to minimise the regulatory burdens on the firm. 
 The AIU has already commenced work at the major firms of auditors and is working closely with the supervisory bodies' monitoring units. So, not only is the Bill replacing something that currently happens by means of new, independent arrangements, but work is already in hand to ensure that that is carried out 
 effectively and in a way that minimises the risk of burdens being imposed. 
 In speaking to amendments Nos. 4, 5 and 6, the hon. Member for Sutton Coldfield outlined his concerns about the definition of the term ''major audit''. We do not want to define the term more closely in legislation, not least because it is hard to predict which companies might be economically significant in the future, as new technologies and business practices change the business and investment environment. We have therefore categorised major audits as audits of listed companies or those of 
''any other company in whose financial condition there is a major public interest.''
 Public interest cases are defined as 
''matters which raise . . . important issues affecting the public interest.''
 In both examples, it will be for the person responsible for making decisions on recognition to determine where it is acceptable for the line to fall. At present, that person is the Secretary of State, but subject to Parliament agreeing to other clauses in the Bill, we intend to delegate the function to the Professional Oversight Board for Accountancy, a new subsidiary board of the FRC, of which the AIU is a sub-committee.

Andrew Mitchell: I think I heard the Minister say that it is important to draw the net as widely as she has not least because a different type of company from the one that she or I might expect to be involved today could need to fall within the net. I agree with her. Can I therefore take it that she will accept the amendment, which would change the definition to ''qualifying companies'' and enable her, in her capacity as a DTI Minister, to determine which companies qualify?

Jacqui Smith: We have made it clear that the determination of which companies within the general definition should be subject to the monitoring will, following other measures in the Bill, be the responsibility of the Professional Oversight Board for Accountancy. Clearly it will be important that people know what those decisions are, but that is not an argument for the amendment, which, on the whole, seeks to narrow the ability to react flexibly to the audits that are most likely to need independent monitoring.

Michael Moore: I am not clear that the Minister has quite made her case. Will she give us some examples of which recent cases might have been referred. She said earlier that new technology companies might appear and grow to become major public interests, but those would be caught by the definition proposed by the hon. Member for Sutton Coldfield of a company that we would expect to see in the FTSE 350 index. I am listening carefully to the Minister, but I am still struggling to understand what the major public interest definition will be. Surely we should try to make the process more transparent, but the proposals appear to give the responsibility for the definition to a small group that, by its nature, will not share it with the rest of us.

Jacqui Smith: I hope to talk later about the difficulties of limiting the definition to the FTSE 350, and also to address the hon. Gentleman's second point, about the transparency with which those decisions are made.
 I shall explain how the monitoring would take place. Depending on the circumstances at the time, the monitoring unit could make different decisions about where the focus of monitoring should be. In its visits to the auditors the unit will be able to focus on certain audits on which there is a need to focus at any particular time. It is important that we maintain that flexibility, and the ability to focus on where there might be issues. 
 The hon. Member for Sutton Coldfield asked whether there would be a right of appeal against a decision that a company's audit was a major audit. The Bill does not impose a requirement that an audit be monitored where there is no such previous requirement. It is not as if there were a range of audits that were not previously monitored but now will be. Instead, clauses 1 and 2 provide that the monitoring of certain audits should be carried out by an independent body instead of by the supervisory body. We do not believe that that would impose additional burdens for the auditor, nor will there be additional burdens for the company, as the work of the auditor is being monitored. In those circumstances, it is not clear why there would be a desire for an appeal. Any disagreement between the supervisory body and those concerned with the independent monitoring arrangements about whether the arrangements would be applied in a particular case would be sorted out between the supervisory body and the arrangements. 
 Following on from that, we recognise that it is important that supervisory bodies know which company audits are to be monitored by the independent arrangements and which they will continue to monitor. The POBA will indicate which audits it will consider the independent monitoring arrangements ought to cover in order to comply with the minimum requirement. That takes up the question that the hon. Gentleman asked about how we will know where the monitoring will be. The POBA will promulgate that information to the supervisory bodies at the outset and whenever those requirements are changed thereafter. 
 Amendment No. 7, which would limit the automatic application of independent monitoring to the audit of FTSE top 350 listed companies, poses significant problems. It would not provide the necessary public reassurance that the audits of companies whose shares are publicly traded and which are subject to monitoring were clearly independent of the recognised supervisory bodies. That is the function of auditing. 
 As the hon. Member for Sutton Coldfield said, certain listed companies are relatively small. Nevertheless, I suggest that people will still depend on their financial reporting being sound and on the audit being appropriate. The quality of the audit is just as important to stakeholders in small companies as it would be for much larger companies. Limiting the 
 provision to the FTSE top 350 would mean that the AIU might not be able to review the audit of a company whose share price performance took it rapidly downwards and out of the top 350. That might be precisely the type of company for which one would want to consider an audit. 
 We do not believe that the requirements for independent monitoring will impose the additional burdens on companies or the recognised supervisory bodies that the hon. Gentleman's amendments seem to suggest. It is not necessary or appropriate to limit the scope of the independent arrangements as proposed by the amendments. We should bear in mind the fundamental principle that we are maintaining the function of monitoring of major audits but ensuring their independence. That is important as it builds confidence in the quality of our audits and therefore in the quality of our corporate governance and financial reporting.

Michael Moore: I shall be brief. I appreciate that the Minister has tried to explain clearly why the definition of the major public interest has to be as it is. I still retain reservations, however. Although it will improve transparency, accountability and oversight in the profession, the new structure will still leave us with a rather vague definition. I am not clear what external influences could rightly be exerted by the Secretary of State or Parliament.
 I have two other quick thoughts. First, the notion is that because the audit firm, not the company, is being investigated, we should not place extra burdens on the company. That may be technically true, but the idea that no reference should be made back to the company at any stage during the process is wishful thinking. Secondly, the idea that a company whose audit became the subject of a major public interest review under the new structure would not be interested in why it should happen, or what it might do to its reputation and its share price, stretches the boundaries of credibility. An acknowledgement of that would be welcome. In the main, the developments are welcome, but I remain to be convinced that the definition is right.

Andrew Mitchell: I am extremely disappointed in the Minister's response. I tabled a range of reasonable amendments that would have improved the legislation. That, after all, has been how the Opposition have approached the Bill in the other place and here. In keeping with the special bond that exists between my parliamentary neighbour, the hon. Member for West Bromwich, East (Mr. Watson) and me, I give notice that I shall seek to divide the Committee on amendments Nos. 4, 5 and 7. I want to record the Minister's intransigence in the face of such a reasonable proposition. I sense from the remarks of the hon. Member for Tweeddale, Ettrick and Lauderdale, and from the quizzical looks on the faces of some Government Back Benchers, who followed what the Minister said with care, that they may have some sympathy for the points that I have made.
 I remind the Committee of what we are discussing. It is about requiring independent monitoring of audits of listed and other major companies. It deals with any 
 company whose securities have been admitted to the official list, which is within the meaning of part 4 of the Financial Services and Markets Act 2000, and with any other company in whose financial condition there is a major public interest. The provisions are too broadly drafted. We need to avoid excessive regulation and supervision where they are not warranted. 
 This definition, which the Government appear today to want to maintain, would cover more than 1,200 companies. Limiting the compass of the term ''major audit'' to the constituents of the FTSE 350 index would cover 96.5 per cent. of the whole market capitalisation. That is to say that the FTSE 350 covers £1.26 trillion of expenditure out of a total FTSE all-share amount of £1.31 trillion. The difference is small, but the effect of my amendments on the business community would be significant. That is the reason for amendment No. 7. This would mean that attention and resources were focused on the areas in which an audit failure is likely to have the most significant adverse impact on the economy. Some 85 per cent. of listed companies not in the FTSE 350 would not face the additional burden of independent monitoring, but there would be relatively little risk to the economy. 
 The Government's decision to include all listed companies seems to be purely arbitrary. Their cut-off point appears to have been selected purely because it is neat rather than justified. This is a choice not between monitoring and not monitoring, but between an independent body that monitors audits of major companies and the regulatory bodies that continue to regulate the audits of other companies. As the law stands, accountancy firms have a statutory obligation to carry out company audits in accordance with the rules set down by the recognised supervisory body. The body has a duty to monitor that. This situation will continue. 
 Definition B, to which I referred, is even more troublesome. It can be seen only as a Government back-up definition to cover all eventualities. It is woolly and ambiguous. There must be at least an attempt to pin down a definition of public interest or we run the risk of abuse, especially when it is uncertain who will decide if there is a major public interest. Obviously, as the Minister said, listings cannot be the sole criterion of whether an audit is major or not, but it is vital that there is certainty as to the scope of the independent monitoring and disciplinary arrangements, for which the Bill does not provide. 
 For those reasons, I seek to put my amendments to the test this afternoon. 
 Question put, That the amendment be made:—
The Committee divided: Ayes 2, Noes 6.

Question accordingly negatived. 
 Amendment proposed: No. 5, in 
clause 2, page 3, line 33, leave out paragraphs (a) and (b).—[Mr. Andrew Mitchell.]
 Question put, That the amendment be made:—
The Committee divided: Ayes 2, Noes 6.

Question accordingly negatived. 
 Amendment proposed: No. 7, in 
clause 2, page 3, line 33, leave out from 'securities' to 'or' in line 36 and insert 
 'are a constituent of the FTSE-Actuaries 350 share index'.—[Mr. Andrew Mitchell.]
 Question put, That the amendment be made:—
The Committee divided: Ayes 2, Noes 6.

Question accordingly negatived.

Andrew Mitchell: I beg to move amendment No. 8, in
clause 2, page 4, line 7, leave out from 'be' to end of line 8 and insert 
 'conducted fairly and except where the interests of justice otherwise require held in public'.

David Taylor: With this it will be convenient to discuss the following:
 Amendment No. 9, in 
clause 2, page 4, line 15, at end insert 
 ', and 
 (f) for ensuring that all defendants are properly represented.'.

Andrew Mitchell: I tabled these amendments following a debate in the House of Lords. They deal with compliance with the European convention on human rights, and can be taken either together or apart. The purpose is to ensure that the Bill clearly sets out the minimum standards to be imposed by the Secretary of State as a condition of recognition of an auditing supervisory body, as regards the arrangements for the fair conduct disciplinary hearings following investigations in public interest cases.
 Each amendment could stand alone, or both could be adopted together. Again, we submit a choice to the Minister. The first should be adopted in any event, and in my view incorporates the requirement spelled out expressly in the second. The second is proposed as a more limited but explicit provision, dealing with the particular issue of concern. The amendments concern clause 2 of the Bill, which inserts a new paragraph 20 into schedule 11 to the Companies Act 1989. 
 Paragraph 20 deals with the arrangements for the independent investigation for disciplinary purposes of public interest cases. 
 Clause 1 of the Bill and the 1989 Act will require the audit profession's recognised supervisory bodies to participate in properly funded arrangements, meeting minimum standards as a condition of their continuing recognition by the Secretary of State, or any other body to which the Secretary of State may decide to delegate that function. 
 Amendment No. 8 would amend new paragraph 20 to provide explicit recognition of article 6 of the ECHR, concerning a defendant's right to a fair and public hearing in the determination of his or her civil rights and obligations. An aspect of fairness, in that context, involves the effective availability of proper legal representation for the defendant, the matter with which amendment No. 9 expressly deals. It is plain that such representation should be available in the context of a public hearing dealing with matters that are probably of considerable complexity and at which the delicate flower of professional reputation is to be exposed. Professional reputation in this area, once lost, is probably lost for ever. Politics is rather different: a thick skin and an India-rubber quality have allowed many a comeback despite a difficulty with a reputation. That is much less possible in the area that we are discussing. The Government have already accepted the force of the argument. On Report in another place, a Minister said: 
''It is of course entirely right that defendants should have the opportunity to be represented.''—[Official Report, House of Lords, 7 July 2004; Vol. 663, c. 805.]
 The explanation offered by the Government for their previous refusal to amend this clause is threefold. First and foremost, the person exercising the recognition function will need to consider all aspects of the disciplinary arrangements, including the right to representation, in order to form a view on whether the arrangements are appropriate. A failure to make any provision in respect of representation where that caused procedural unfairness could call into question whether the arrangements were, indeed, appropriate. Secondly, a disciplinary scheme for defendants, which provides for funded representation, already exists under the Accountancy Investigation and Discipline Board. The Government think it unlikely that that will ever be watered down. Thirdly, according to the Government, the circumstance in which representation should be provided, and the myriad other details concerning the functioning of the arrangement are best left to be determined under the disciplinary arrangements rather than being prescribed in legislation. 
 Those are the three arguments that were put up by the Government when the issue was probed in the other place. In other words, the Government have already accepted the principle behind the amendment, that is to say that compliance with article 6.1 of the European convention on human rights will be an implicit requirement for recognition, without which the disciplinary procedures will not meet the requirements for the recognition of the body. However, they refuse to amend because the drafting 
 job would be too difficult for them and is best left to the AIDB. I pass over the implied insult to the Minister's officials and the parliamentary draftsmen in the argument put up by the Government in the Lords. 
 The Government seem content that there is already adequate provision for representation, although they have not said that they are satisfied, as the Secretary of State or his or her delegate must ultimately be, that the procedures of the AIDB, in all other respects, satisfy the requirements of fairness. It is not acceptable and, indeed, it is unnecessary that such an important and fundamental issue as the fairness of the procedures should be left to be implied without statutory expression. That is particularly so, given that proposed new paragraph 20(1)(c) of schedule 11 to the Companies Act 1989 already deals, in part, with the manner in which hearings are to be conducted by providing that they must be in public. What is the requirement to have a public hearing if that is not the manner in which disciplinary hearings will be conducted? 
 If that detail is worthy of statutory status, it is difficult to understand why fairness, or the right to representation, is not. It is unacceptable and unnecessary to leave the AIDB or the supervisory bodies, none of which is a statutory entity, uncertain as to what the standards are that the arrangements must meet. It is equally undesirable and unnecessary that the concept of a fair hearing—a term the implications of which are known and can be discerned from a wealth of European and English legal authority, and whose application to these arrangements the Government have already accepted—should be hidden behind the vague term ''appropriate''. 
 Those deficiencies in the Bill are unnecessary, because the first amendment gives statutory expression to the standard to be applied by the body performing the recognition function, but avoids the need to set it out in the Bill in great detail and in several rules, which the Government so fear. As regards the second amendment, all parties agree that the availability of representation is a necessary aspect of the disciplinary arrangements. There is, therefore, no good reason why that should not be confirmed in primary legislation.

Jacqui Smith: The amendments concern the independent arrangements relating to the investigation and discipline functions. It may be useful to hon. Members if I outline briefly the way in which the disciplinary scheme of the AIDB of the FRC will operate. The board's disciplinary scheme, and supporting regulations, are publicly available on the FRC's website. They provide a framework for disciplinary hearings under the scheme. The framework sets out the grounds for investigation and disciplinary proceedings, and the way in which an investigation may be initiated. Cases can be referred to the AIDB by participating accountancy bodies or the AIDB can itself decide to examine a case.
 The scheme also sets out the order of proceedings for disciplinary hearings, including time periods for the submission of evidence. The hearings will be conducted in public and defendants will have an 
 opportunity to present their own evidence, cross-examine witnesses and test the evidence against them. 
 The hon. Gentleman has made much of the necessity for representation and for the board to ensure that there is representation. I agree that representation in such cases is important, but I disagree with him about the scope of his amendment. A disciplinary tribunal may require the AIDB to meet the reasonable costs of a defendant's legal representation at a hearing if, taking into account all the circumstances, the absence of legal representation would be contrary to the rules of natural justice. 
 The tribunal can act in that way only if it concludes that it is not reasonable for a defendant to conduct his defence without legal representation—for example because of the complexities of the issues involved—and that the defendant has established that he cannot afford, and does not have adequate insurance cover for, legal representation. The right to representation is not limited to tribunal hearings. Throughout an investigation, those being investigated would be entitled to be legally represented should they so choose. 
 The hon. Gentleman referred to article 6 of the ECHR. That article does not imply a general right to free legal representation in civil disciplinary proceedings. There can, however, be situations in which it would procedurally unfair for someone not to have legal assistance, such as when it would be difficult to mount a defence with the lack of such assistance. Those are the instances that are covered, as I suggested, by the AIDB's arrangements. 
 The intended effect of amendments Nos. 8 and 9 is that, for disciplinary arrangements to satisfy the recognition requirements, the procedures must be conducted fairly and proper representation for all defendants must be ensured. On Second Reading the hon. Gentleman said that he accepted our argument that if there was no access to representation the person exercising the recognition function would not agree that the disciplinary arrangements were appropriate. He does not seem quite to have accepted that today. However, he concluded then that there seems to be no good reason not to set the rights of the defendant in stone. 
 I disagree about that conclusion. The aim of new paragraph 20(1) is to set out the minimum requirements for appropriate independent disciplinary arrangements and it covers what we believe is most important about such arrangements—their functions, their transparency and their independence. There are already sufficient safeguards to ensure, where appropriate, that the disciplinary arrangements for public interest cases are fair and provide sufficient access to representation. 
 In those circumstances I do not see the need for additional requirements for disciplinary hearings, as proposed in amendments Nos. 8 and 9. Taking a belt-and-braces approach to legislation is not always the right thing to do, nor even the best thing legally, particularly when it seems to imply a greater 
 responsibility for the ensuring of legal representation than would be necessary to comply with article 6. Incidentally, we believe that all the arrangements are ECHR-compliant. I should emphasise again that it would not be open to the disciplinary arrangements to ignore the issue of representation. The fact that that is already provided for seems a good reason not to put such an additional requirement into the legislation. 
 The same arguments apply to amendment No. 8, which would insert a statutory requirement that hearings should be conducted fairly. The person exercising the recognition requirement would not decide that disciplinary arrangements whose hearings did not comply with the requirements of fairness were appropriate. To that extent, the need for the hearings to be operated fairly is already covered. I do not therefore see the benefit of adding the requirement to cover those aspects as opposed to any number of other operational details that might affect the appropriateness of the arrangements, but that are already made clear in the information, which is publicly available on the FRC's website, on how the disciplinary scheme will operate . 
 I hope that I have reassured the hon. Gentleman—I do not want him to be greatly disappointed—that the amendment is unnecessary and that there is a potential danger of over-legislating with such provisions. I hope that on that basis he will feel able to withdraw the amendment.

Andrew Mitchell: I had an unpleasant feeling while the Minister was responding that she was not going to accept the Opposition's amendment. Her argument seems to be as follows. Ministers have told the House of Lords and the House of Commons that what the amendment says will happen and the amendment is therefore unnecessary. I submit that that is the wrong approach. If the change is to take place, let us reassure all the different bodies outside this place that that is indeed so.
 Although clause 1 places new requirements on the recognised supervisory bodies, by making it a condition of recognition that they participate in independent arrangements for the investigation and taking of disciplinary action in relation to public interest cases, clause 2 outlines the new disciplinary arrangements. Beyond requiring that independent disciplinary hearings must usually be held in public, the clause omits to specify how those hearings are to be conducted. That is the reason for the amendment. 
 The amendment would ensure that every defendant would have access to experienced advice and to those who would be able to advise them. The Government have two arguments against such a provision. The first, as was said in the House of Lords on 16 March, is that how disciplinary hearings will be conducted will not be prescribed in legislation because the representation of all defendants is too detailed. The second is that a disciplinary scheme for defendants already exists under the AIDB. 
 With regard to the first argument, the representation of all defendants is a crucial issue. Concerns about the difficulties of drafting such a 
 provision and the detail required or work involved should not prevent us from legislating appropriately. As to the second, relying on the AIDB's disciplinary scheme is insufficient. It is not sufficient for the AIDB's disciplinary arrangements to take account of the need for fair representation. The AIDB must be required, now and in the future, to provide for fair representation. The AIDB is not a statutory body and cannot provide statutory certainty that all defendants will be properly represented. As all parties agree that representation is necessary, Lord Sainsbury, the Minister for Science and Innovation, said in the other place: 
''I take on board the basic point of the amendment''
 that was proposed there 
''that there should be consideration that everyone is properly represented.''—[Official Report, House of Lords, 16 March 2004; Vol. 659, c. GC34.]
 The Minister stated that the Bill is compliant with the ECHR. There is no good reason why that should not be confirmed in primary legislation. 
 The Minister pilloried me for making ''much'' of the representation issue. I make no apology for that. It is extremely important. That is one of the reasons why we are here. For that reason, I would like to put the amendments to the test. I hope, Mr. Taylor, that you will permit us a vote. 
 Question put, That the amendment be made:—
The Committee divided: Ayes 3, Noes 5.

Question accordingly negatived. 
 Amendment proposed: No. 9, in 
clause 2, page 4, line 15, at end insert 
 ', and 
 (f) for ensuring that all defendants are properly represented.'.—[Mr. Andrew Mitchell.]
 Question put, That the amendment be made:-—
The Committee divided: Ayes 3, Noes 5.

Question accordingly negatived. 
 Clause 2 ordered to stand part of the Bill. 
 Clauses 3 to 7 ordered to stand part of the Bill.

Clause 8 - Auditors' rights to information

Andrew Mitchell: I beg to move amendment No. 10, in
clause 8, page 10, line 11, after 'explanations', insert 
 'as he specifies in writing to that person and'.

David Taylor: With this it will be convenient to discuss the following amendments:
 No. 11, in 
clause 8, page 11, line 19, after 'subsection (2)' insert— 
 '(a) to show that he had no actual knowledge of the information he is said to have possessed, and that ought to have been disclosed to the company's auditors, or 
 (b) to show that the auditor had requested the employee to ''provide him with such information or explanations as he thinks necessary for the performance of his duties as auditor'', but had not given specific direction, or specified the nature of the information required or (c).'.
 No. 12, in 
clause 8, page 11, line 19, leave out 
 'it was not reasonably practicable for him' 
 and insert 
 'he was not reasonably able'.
 No. 13, in 
clause 8, page 11, line 20, leave out 'required' and insert 'specified'.

Andrew Mitchell: I tabled the amendments to deal with an issue that was identified also in the other place. On Second Reading, I drew the House's attention to the fact that the original clause 9 required directors to state not only that they had given relevant information to the auditors but that each and every other director had given the auditors the information that he or she should have given. Not only would directors have been asked to take responsibility for the actions of their colleagues, they would also be required to state that there was no information that had not been disclosed to the company's auditors—an extraordinary requirement.
 Although this matter has been dealt with by the introduction of a new clause 9 following several amendments sponsored by Lord Hodgson of Astley Abbotts, officers and employees of the company, to whom I referred a moment ago, remain relatively at risk under clause 8. Clause 8 empowers an auditor to require a wide range of people, including ''any officer or employee of the company'' or of a subsidiary, under sanction of serious criminal penalties, to provide him with information. An auditor may require information from any and every employee of the company, irrespective of their role and position. 
 There is a considerable risk that employees who have not had their duties explained to them in as much detail as directors might unwittingly fail to provide information, or sufficient information, and face considerable penalties and/or fines. My amendments Nos. 10, 12 and 13 are designed to prevent that happening. As I said on Second Reading, it fell to the Conservative party to protect employees below board level, who appear to have escaped the attention of the new Labour party. 
 Members of the Committee can see from the amendments what we are trying to achieve. For the first time, the Bill imposes a requirement on employees as well as officers to provide information that auditors believe to be necessary for the performance of their duties. As I said, failure to comply is a criminal 
 offence. The Bill imposes a criminal sanction, but imposes no obligation on the auditor to state clearly what information or explanation he requires. It therefore poses a risk of prosecution to employees, particularly to junior ones, because they misunderstood the nature or import of the auditor's request. 
 Amendment No. 10 would impose a requirement that the requested information or explanation be specified in writing. The second problem in the Bill is that the defence to prosecution, as worded, does not adequately take into account the position of a junior employee who might be prosecuted for failing to provide information or an explanation of something that it is not reasonable to expect them to provide or understand. Amendments Nos. 12 and 13 reword the clause in a way that more clearly allows an employee a defence in such circumstances. 
 Amendment No. 11 is an alternative to amendments Nos. 10, 12 and 13. The first and third amendments stand together. The second amendment is a stand-alone amendment, but is usefully debated with the others. Clause 8 replaces section 389A of the Companies Act 1985, and for the first time includes employees alongside officers in the category of persons from whom auditors can request information that the auditors believe to be necessary for the performance of their duties. As I said, failure to comply with such a request without delay is made a criminal offence under the replacement section 389B(2). For the first time therefore, employees, from the most junior accounts clerk or secretary, postman or photocopier attendant—I draw the Committee's attention to Hansard reports of the debate in the House of Lords on 17 March 2004—are subject to demands for information and explanations by auditors and are exposed to criminal sanctions if they fail to comply. 
 Consideration was given in another place to the need to provide for auditors to demand written answers from officers and employees in order to limit the risk of prosecutions following confusion about oral responses to auditors' questions. In a sense, amendment No. 10 addresses the reverse of that situation. Although the Bill imposes a criminal sanction, it imposes no obligation on the auditor to state clearly what information or explanation he requires. The purpose of the amendment is to address the risk, which is all the greater the more junior the employee concerned, of an employee being exposed to the risk and burden of a prosecution by reason of an innocent failure to provide information because he or she has misunderstood the nature or import of it, or been intimidated by a complex or poorly formulated oral request by an auditor for information or an explanation of some matter that the auditor believes is relevant. 
 The amendment would impose a requirement for the requested information or explanation to be specified in writing. It is hard to think of a more reasonable amendment. The Government have stated, 
 however, that they see no need to set the limits on the questioning of employees, and that 
''asking the postman for information . . . may be the best way of finding out what is happening in the company.''—[Official Report, House of Lords, 17 March 2004; Vol. 659, c. GC82.]
 The corollary of that is that legislation must take account of the fact that, for the first time, auditors will be dealing with people who may have only partial awareness and understanding of the financial nature and import of information that they may have acquired during the course of their employment, or otherwise. 
 There is a distinction between having information and having knowledge. As I explained on Second Reading, just because I have an encyclopaedia in my study, it does not mean that I enjoy encyclopaedic knowledge. Similarly, an employee may handle invoices, accounting records, letters and so forth, without realising their import or relevance to a broad and unfocused request by an auditor for information or an explanation of some transaction or practice. The auditor should be required to specify the information that he requires, in order that the persons from whom information and explanations can be requested are clear as to what is required of them. 
 The amendment would require the auditor to pause and to consider carefully and clearly the nature of the information or explanation that he was demanding from an employee, and to set it out in writing to minimise confusion. It would allow an employee to ask for advice, or for the assistance of a third party, in understanding the request, if necessary, without the risk of further confusion through a process of what might be called Chinese whispers. The spectre of a process of prosecution, if the employee gets it wrong, will weigh heavily on every employee as it is. 
 The second problem in this part of the Bill, which is related to the first, is that although section 389B(3) provides a defence for a person charged with the offence of failing without delay to comply with a requirement to provide information or explanations, the wording of the defence is not sufficient to protect a junior employee who may have been prosecuted for failing to provide information or an explanation requested of him, which it was not reasonable to expect him to be able to provide. 
 Amendments Nos. 12 and 13 reword the clause in a way that more clearly allows an employee a defence in such circumstances. The employee's failure to comply promptly might have been the result of practical difficulties, such as illness or injury, or difficulties with computers. In such cases, the defence that it was not reasonably practicable for him to provide the information or explanation, as set out in the amendment, will help him. However, failure to comply, even if the auditor clearly specifies his requirement, may well be because the employee lacks the knowledge to provide an explanation related to information to which he happened to be exposed or to have in his possession. It is important to note that he could face prosecution for failing to give an explanation, or a full explanation of matters, in such circumstances. 
 Such employees may lack the experience, training or intellectual ability to provide the explanation that the auditor might expect. No one would argue that they should be convicted if they could show that to be the case, but it is far from clear that the term ''reasonably practicable'' in the Bill would apply to a person in such a situation. The result would be that he or she might be deprived of a defence in circumstances in which they should clearly have such protection. 
 The concern is that the defence, as worded, is potentially too restrictive. The change in wording suggested in the second amendment subtly widens the defence and enables an employee to take advantage of it in such circumstances. However, it does so in a way that does not offer any wider defence for incompetent or unco-operative directors and officers than they already enjoy. The secretary in an accounts department has some chance of proving that he or she ''was not reasonably able'' to give an explanation on a topic because he or she had no actual knowledge of a matter having regard to—among other things—the nature of his or her functions, and what he or she could reasonably be expected to be able to explain. 
 A director in possession of information would not be able to hide behind the words of the subsection as amended by claiming, ''I am only a director,'' if they fail to give an explanation when required, unless they could show that there were other practical reasons why they could not comply. In other words, the suggested amendment increases the protection for those persons for whom there is concern without watering down the ability of an auditor to require information from those persons most likely to possess information or who ought to be able to explain matters due to their position in the company. 
 The amendments are about equity and fairness to those below board level, who have been forgotten in consideration of the Bill by Labour Members, creatures as they are of the Prime Minister's fascination with big business. I appeal to the old Labour sentiments on the Government Benches. Stand up for the underdog who is inadvertently being trampled under the boot of capitalism in this clause. I can tell from the faces opposite that there is deep concern that those on the Front Bench have forgotten those below board level, and I invite them to join me in voting for these extremely reasonable amendments.

Michael Moore: Having been supportive of some of the arguments that the hon. Gentleman has advanced during the past couple of hours, I find myself at odds with him from my own practical experience.

Andrew Love: It is the socialist content.

Michael Moore: I am sure it was not the socialist spin that the hon. Member for Sutton Coldfield added. I will also spare the Committee long, boring stories of what it is like to be an auditor. [Interruption.] No, really. Despite hon. Members' protests, I shall resist.
 The hon. Member for Sutton Coldfield, against the spirit of much of what he has argued, is introducing a very bureaucratic approach to deal with problems that do not actually exist. I hope that the Minister will confirm that the drift of the legislation will be more 
 targeted than the hon. Member for Sutton Coldfield fears. The person in the tea room or the accounts assistant is protected by common sense, as much as anything else, with regard to what they may know, unless they are deliberately shredding things, which would be a different matter. 
 The big gap in the middle is where we find the officers, the regional accounts managers, the sales departments and all the other bits of the organisation, who may well know much more about what is going on. From bitter experience, I know that they are the people from whom it is hardest to get information. Such an additional power for the auditor is very welcome.

Jacqui Smith: Up to this point, we have talked about the strengthening that the Bill provides for the quality of audit from the point of view of monitoring those audits. The clause is important because it provides the opportunity for auditors to do their work in the most effective way, as was ably identified by the hon. Member for Tweeddale, Ettrick and Lauderdale. In order to ensure that audits are of the highest possible quality, we need to enable auditors to obtain information and explanations from a wider category of people. The clause contains important provisions on the rights of auditors to obtain that information, most of which derive from the existing law but, for the first time, we now require information and explanations from a new category of people—employees. As the hon. Gentleman said, they can be an important source of information, which could enable auditors better to establish a full picture of the company's financial position.
 The extension also reflects recommendations from the company law review and the co-ordinating group on audit and accounting issues. Far from this being a question of the jackboot of capitalism, it is about ensuring that we are best able to cast light on the business of companies and to ensure that audit is carried out effectively. Quality audit protects the employees of a company as well as its shareholders, stakeholders and others who have dealings with it. It is in all of our interests to ensure that information is available to carry out the audit.

Andrew Mitchell: Does the Minister accept that it is possible that the postman, the junior accounts clerk or the young secretary could be placed in a Kafkaesque position, where they are asked for information that they do not realise has been through their hands?

Jacqui Smith: I hope that what I am about to say will reassure the hon. Gentleman. Although all employees will be liable to provide information, as the hon. Member for Tweeddale, Ettrick and Lauderdale pointed out, the auditors will want to ask only those people whom they consider most likely to have the information. It is not likely that an auditor will pick on the photocopier attendant when, by asking a regional manager, they would be more likely to get hold of the information. That is the first reason why I suspect that some of the concerns of the hon. Member for Sutton Coldfield are overstated. However, I hope that I will come on to reassure him that some circumstances that he outlined will not be offences, but will be covered by the defences available in the clause.
 Our aim is to enable auditors to carry out their duties more effectively. We believe that amendment No. 10, which would require requests for information to be put in writing, would be a step backwards. Under the existing legislation—section 389A of the Companies Act 1985—auditors are already entitled to require information and explanations from a company's officers. There is no obligation for auditors to require information and explanations in writing or in any specified form, and there are good reasons for that. Auditors need to be able to approach their tasks flexibly, utilising whatever methods and processes they feel are most appropriate. That will not always mean requiring information and explanations in writing. To insist on that seems unduly bureaucratic and time-consuming, and potentially even a way for people to avoid providing information of which it might be important for the auditor to get a clear view. 
 The hon. Member for Sutton Coldfield is perhaps concerned that employees, who for the first time are required to answer auditors' questions, may not understand what is required of them. I understand that concern, but I do not believe that that will be a problem. First, we believe that many employees can, and already do, assist and are able to respond to requests from auditors in whatever form they are given. The measures represent a strengthening of the ability of auditors to request and gain information. They are not a fundamental rewriting of the process of auditing, with auditors all of a sudden asking a new range of people for information. They will have a strengthened right to request information. 
 Amendment No. 11 concerns the offences relating to the failure to provide information and explanations to auditors under new section 389B. The aim of the amendment is to ensure that individuals who fail to provide information and explanations have a defence if they do not actually know the information that is required or if the auditor's request is not specific enough. I have sympathy with the hon. Member for Sutton Coldfield's desire to achieve that objective and I reassure the Committee, as has been said elsewhere on previous occasions, that we have carefully considered the position of those required to give information. In particular, we have considered the position of employees who are for the first time required to respond to auditors and who could potentially be caught by the criminal offence. 
 Perhaps it would be helpful for me to explain in a little more detail, or not at this precise moment— 
 Sitting suspended for Divisions in the House. 
 On resuming—

David Taylor: Before the suspension, we were discussing amendments Nos. 10, 11, 12 and 13 to clause 8.

Jacqui Smith: I was, I hope, providing some reassurance for the hon. Member for Sutton Coldfield about the broad scope of the defence in
 respect of employees asked by auditors to provide information. Let me give some examples of cases in which the defence that it was ''not reasonably practicable'' for the employee to provide the information would bite. A range of reasons could fall under that heading. The person being asked to provide the information might simply not have known about it, and it would not have been reasonably practicable for him to find that information, or he might have provided what he considered necessary but—this goes back to the point about providing the instruction in writing—because the auditor was insufficiently clear, that could have proved not to be the case. That would mean that it was not reasonably practicable for him to provide the information.
 There are many other examples. I think that the hon. Member for Sutton Coldfield mentioned illness. We believe that the defence would cover circumstances in which, because of illness, an employee was physically incapable of providing information to an auditor, or had misunderstood—although reasonably misunderstood—what was being asked. It could also be that the information was not available in the required format and could not be obtained to meet the auditor's deadline. 
 Section 389B is capable, depending on the circumstances of the case, of covering all those instances, so I would argue that the concern of the hon. Member for Sutton Coldfield that it is a narrow defence is not justified. I hope that I have given him some reassurance. 
 Finally, I am grateful to the hon. Member for Sutton Coldfield for having set out the thinking behind amendment No. 12, but, for some of the reasons that I have already outlined, I do not believe that it is necessary. It is difficult to see any substantive difference between saying that it is ''not reasonably practicable''—particularly given the interpretation that I have just placed on those words—and, as is proposed in the amendment, 
''he was not reasonably able''.
 If a person is not reasonably able to provide information, it is difficult to see how it could be reasonably practicable for him or her to provide it. There is nothing to choose between our approach and that taken by the hon. Member for Sutton Coldfield. Given the significance of the measure designed to ensure that auditors can access information more broadly, and my reassurances about the broad scope for the defence of employees, and the practicalities of who is likely to be asked for information and when, I hope that the hon. Gentleman will feel able to withdraw his amendment.

Andrew Mitchell: I tabled the amendments because the clause empowers an auditor to require a very wide range of people, under sanction of serious criminal penalties—a point that I have sought to emphasise to the Committee—to provide the auditor with necessary information. Those people include
''any officer or employee of the company''—
 a definition that we believe to be extremely broad and unlimited. Understandably, an auditor might require information from a wider group than merely the 
 officers of the company. The question is whether that should extend to every employee, and if it should, what rights that employee should have. 
 Some employees might hold relevant information, but the vast majority might not. The information could well be held by their line manager or a more senior member of the company. Further, it is unclear whether the auditor must specify the nature of the information 
''necessary for the performance of his duties as an auditor'',
 or whether employees are expected to know what information is required. If the latter, there is a risk that employees who have not had their duties explained to them in as much detail as directors have might unwittingly fail to provide to provide sufficient information, and will face considerable penalties. That is why we have sought to examine clause 8 in such detail. Junior employees may have information but, as I explained in some detail, may not fully comprehend what is required of them or the nature of the information to which they have access. There is, as I said, a distinction between having information and having knowledge. 
 I have listened carefully to what the right hon. Lady has said, and she has reassured me to some extent on some of the points that I made in my opening remarks, but not on all of them. I am aghast that members of the Committee are not willing to join me in ensuring that a junior employee who wants to go to see the trade union official with a piece of paper will be denied that opportunity. Despite that, and despite my sadness that Government Members are not willing to stand up for people below board level, I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Clause 8 ordered to stand part of the Bill. 
 Clauses 9 to 12 ordered to stand part of the Bill. 
 Schedule 1 agreed to. 
 Clauses 13 to 16 ordered to stand part of the Bill.

Clause 17 - Levy to pay expenses of bodies conerned with accounting standards etc.

Andrew Mitchell: I beg to move amendment No. 14, in
clause 17, page 22, line 33, at end insert— 
 '(c) must take into account the financial condition of the bodies or persons by whom the levy will be payable.'.

David Taylor: With this it will be convenient to discuss the following amendments:
 No. 15, in 
clause 17, page 22, line 33, at end insert— 
 '(d) must take into account representations made to him by those bodies and persons.'.
 No. 16, in 
clause 17, page 22, line 33, at end insert— 
 '(e) must not increase the rate of levy by more than 10% in any one year.'.

Andrew Mitchell: Amendment No. 14 is an extraordinarily reasonable concept for us to insert into the Bill. After all, these are the people who will be
 paying for it, and why should they not have their financial condition taken into account? Amendment No. 15 is another inordinately reasonable proposition, as is amendment No. 16, given that 10 per cent. would be four times the level of the Bank of England's target for inflation.
 The amendments aim to introduce three clarifications of the Secretary of State's power to fix the amount of the levy. They are independent of each other, and amendment No. 14, in particular, stands on its own. In accordance with the old Government Whips' pact, I draw the attention of the hon. Member for West Bromwich, East to the fact that I hope to divide the Committee on the amendments, in the unlikely event that the Minister decides not to concede them—a prospect in which I have every confidence. 
 I shall deal first with amendment No. 14, on taking account of companies' financial condition. The Government apparently anticipate that the levy will be paid by listed companies and by members of the Consultative Committee of Accountancy Bodies. It is therefore as clear as it can be that the levy will be paid both by entities such as HSBC and BP, and by entities with a market capitalisation of less than 1 per cent. of those massive commercial organisations. It cannot, therefore, be fair that a levy system should impose the same payment obligation on both. Clause 17, however, appears to suggest precisely that. 
 The Government may say that that is not what will happen. If so, it will do no harm if the clause says as much. It is never enough for a Government—especially, I am sorry to say, the present Government—to ask for ill-drawn legislation to be passed on the basis of assurances about how it will be interpreted. Of course, if the proposal is that the payments for all companies will be the same, that intention should be flushed out into the open. 
 Our amendment would require the Secretary of State to take the financial condition of paying companies into account. We envisage that that would be done by the regulations made under section 17(1), which specify by description the companies that will be subject to the levy. It would be done by reference to, say, several bands. Companies falling within a particular financial band would pay an appropriate amount. Such a method of allocating the levy would be fair. What is apparently envisaged at present would be most unjust. 
 Amendments Nos. 15 and 16 are about taking account of representations and limiting the annual increases in the levy. Clause 17 imposes on the Secretary of State a barely-fettered right to charge companies for the costs of the grant-aided bodies envisaged in the Bill. Given that it will be in the Government's interest to increase that charge, and thereby decrease the proportion of the costs met by their own grant, it is essential that the Secretary of State's ability to levy the charge should be limited in every reasonable way. 
 No doubt the present Secretary of State, even under Treasury pressure, would never abuse the loose drafting of powers that would be given to her under the clause. It is our task, however, to ensure that the 
 Bill will safeguard those whom it affects against all future contingencies. We propose to make it clear in the Bill that the Secretary of State must take into account representations from those who will pay the levy. 
 No doubt the Government will again say that the Secretary of State will of course take into account any relevant representations. No doubt the Government will say that industry will be represented in the process by which the budget of the grant-aided bodies will be fixed and in the process by which the levy will be raised. I draw the attention of the Committee to proceedings in the Grand Committee of the House of Lords on 22 March. We question whether that is enough. We all know that such assurances are swept aside when the Treasury is on the rampage. 
 The fact that industry may be represented when the budget is fixed does not meant that it will be represented when the Government determine what proportion of the budget will be met by industry directly, and what will be met by the Government. It is there that the danger for industry lies, and there that the Secretary of State's powers must be circumscribed. What objection can there be to requiring the Secretary of State to take account of the representation of persons who will be affected financially by her decisions? Our proposals will ensure that she does. 
 Finally, the proposal to cap increases in the levy to 10 per cent. will provide a further safeguard. It is difficult to conceive of circumstances in which the proper costs to be met by the levy would increase, once it was established, by more than 10 per cent. a year. It seems to us that the Government could want to increase the levy by more than 10 per cent. only if they were trying to reallocate the burden of paying the grant-aided bodies' costs so that industry would pay more and the Government would pay less. That is just what the Government should not be entitled to do without amending the legislation. 
 To summarise this important issue, clause 17 allows the Secretary of State to provide for the levy. According to paragraph 88 of the explanatory notes, those who must pay it will include listed companies and the members of the Consultative Committee of Accountancy Bodies—the Institute of Chartered Accountants in England and Wales, the Institute of Chartered Accountants of Scotland, the Association of Chartered Certified Accountants, the Institute of Chartered Accountants in Ireland, the Chartered Institute of Management Accountants and the Chartered Institute of Public Finance and Accountancy. They face the prospect of an ever increasing levy. 
 The clause allows the Secretary of State to increase the levy without limit, as there is no clear estimate of how much additional funding the FRC will need to perform its functions. Current estimates predict an increase in costs from £5.5 million per year to £12 million by 2006–07, which will be matched by an 
 increase in contributions from listed companies from £400 to around £1,600. 
 It is understood that the president of the CBI and the chairman of the Consultative Committee of Accountancy Bodies are directors on the management board and will be involved in the preparation of the budget that leads to the setting of the fee levels, but I question whether that is sufficient protection, not discounting the eminence of both men. With the best will in the world, they may attend to the interests of those whom they represent, only to be overruled. 
 It is vital that the burden on business does not become excessive, and the Secretary of State must take into account representations made to her by or on behalf of those who will pay the levy. Burdens on business come in many forms, particularly under this Government, hence our reasonable amendments.

Brian Cotter: In some respects the hon. Gentleman has raised some important issues, but the amendment, and the others in the group, are tightly drawn and it is difficult for me to go along with them. However, the issue that he has raised by tabling the amendment is important, and I hope that the Minister will answer the point to our satisfaction. I hope that the Minister can answer the concern about whether the smallest of firms will bear a disproportionate burden when the levy is imposed. I hope that the Minister can assure us on that point and tell us some good news.

Jacqui Smith: As we have said, the main aim of the changes that we have discussed is to strengthen the independence of the regulatory regime. That is important not only for market confidence in the UK, but to show regulators in other countries that they can rely on our system. A key element of independence is security of funding. We need to be able to show that the regulator cannot be influenced by threats to withhold funding from those whose job it is to regulate. That is why the Bill introduces a power to enable us to impose a levy to secure contributions to the funding of the independent regulator.
 We currently have no intention of using that power. The purpose is to ensure that there is no danger in future of the independence of the regulator being affected by a refusal to pay voluntary contributions from any of the three parties that are currently responsible for funding it—the Government, the professional bodies and business. The present voluntary funding arrangements for the Financial Reporting Council have worked well to date. We hope that things will continue on a voluntary basis and that we will never have to use the levy power. 
 We are playing our part in bringing forward clause 16, which will give the Government the power to contribute our share. In other words, clause 16 gives a grant-making power to Government, to enable us to pay our contribution towards the regulatory activities of the Financial Reporting Council. The current provisions needed to be broadened slightly because of the breadth of the Financial Reporting Council's activities. It is right that, given the important contribution that the council will make to 
 the regulatory regime in the UK and the knock-on effects of that for good corporate governance, which will benefit the UK economy, a proportion of the taxpayers' contribution should go into that. 
 Clause 16 makes clear the Government's grant-making powers to fund our part of that activity. However, for the reasons I have outlined, we also consider it necessary to take a levy power in case the voluntary arrangement fails to work effectively. I am sure that nobody believes that that is likely to happen, but we do not want even to be under any threat that the independence of the regulator could be put in doubt because of the withholding of the contributions necessary to make it operate. 
 I turn to the amendments of the hon. Member for Sutton Coldfield, and first to amendment No. 14. In the event that the Government needed to impose a levy, it would be a matter for the regulations whether a flat rate would be applied. Clause 17(4) would not prevent the rate of the levy being set differently for different categories of levy payer. In determining the rate of the levy, all relevant matters will be taken into consideration, including the ability of levy payers to pay. 
 The hon. Gentleman suggests that he is unwilling to take the Government's word for that, but we already have evidence of the willingness of the FRC to take into consideration precisely the point raised by the hon. Member for Weston-super-Mare about the differing abilities of companies of different sizes to be able to contribute their fees. 
 The FRC has adopted a two-tier fee system on listed companies for 2004–05. The higher rate will be applied to FTSE 350 companies, with the remaining listed companies being charged at a lower rate. That tiered approach is in line with the approach of the Financial Services Authority, which is changing the basis of its fee to listed companies from a flat fee to a fee based on size, possibly related to market capitalisation. If it were to be necessary to introduce a levy to secure the funding of the FRC, we anticipate that that levy would reflect the arrangements that were then in place for the voluntary contribution. Therefore, I do not consider amendment No. 14 necessary. 
 Amendment No. 15 would require the Secretary of State to take into account representations about the levy. As I have said, we anticipate that any levy that it would be necessary to impose would reflect the arrangements put in place by the FRC in respect of the voluntary contribution. The hon. Member for Sutton Coldfield is right that both business and the accountancy profession will have an opportunity to be consulted on the levy, although I give more strength to that than he did. The president of the CBI and the chairman of the Consultative Committee of Accountancy Bodies sit on the FRC's new management board, and in that capacity they are directly involved in the preparation of the FRC's annual budget. 
 On listed companies, we intend that their contributions should continue to be collected on behalf of the FRC by the FSA, alongside the listing 
 fee. The FSA consults listed companies annually on the level of the fee and we envisage that the contribution to the FRC will form part of that consultation. Not only is there CBI and CCAB representation in determining the budget and therefore the fee, but there is the opportunity for consultation via the FSA consultation on the level of that in respect of all businesses that are likely to have to pay. As with many other powers, the Secretary of State would of course take into consideration any relevant representation she received concerning the exercise of that power. 
 I hope that this will reassure the hon. Member for Sutton Coldfield that there will be sufficient and codified opportunities for business and the accountancy profession to make representations on the amount of the FRC's funding. 
 Amendment No. 16 would limit the ability to increase the levy power, in the event of that power's being used. In effect, of course, that would limit the regulatory system's ability to respond to unexpected changes in regulatory funding needs. I acknowledge that there has been a significant increase in the FRC's funding requirements and in the dimensions outlined by the hon. Gentleman , but let us remember that the increases are to fund the new regulatory arrangements, which the Committee today identified as being much superior, in independence and impact, to the arrangements currently in operation. The increase will be worth while, particularly because of the impact of that better and more independent regulatory system on the quality of financial reporting audit. 
 I do not anticipate another major restructuring, but if a future financial scandal necessitated another substantial increase in the FRC's funding requirements, it would be wrong if the FRC's needs could not be addressed through the levy. 
 I would like to emphasise two important points. First, I reiterate that we do not intend to use the levy power unless the FRC's current voluntary funding arrangement fails to work effectively. The purpose of the clause is to provide an independent safety net and the security of independence so that, whatever decisions professional bodies and companies might take about their willingness to contribute, the FRC cannot be influenced by any of its funders threatening to withhold money. 
 Secondly, the hon. Gentleman has understandably placed emphasis on the need to consult business and the accountancy bodies. Under the clause, if we decided to impose a levy, Parliament would have the opportunity, under the affirmative procedure, to debate both the level at which the levy should be set and the classes of body that should be required to pay it. There is parliamentary scrutiny—consultation hold, in effect—in respect of the ability to impose the levy if necessary. I hope that I have once again reassured the hon. Gentleman, and that he now feels able to withdraw his amendment.

Andrew Mitchell: Not for the first time today, I am extremely disappointed by the Minister's reaction to my amendments. In her gentle and persuasive style, she has told us that my amendments, although
 extremely reasonable, are not necessary. We are asked to give Ministers a power to raise a levy, but at one point the Minister said, ''We have no intention of using these powers.'' If that is so, surely it is extremely reasonable of me to want to put that in the Bill. After all, the full might and force of the Conservative party's research department has been used to hone the amendments. They are reasonable; that is self-evident.
 How can anyone complain about the suggestion that the Secretary of State should 
''take into account the financial condition of the bodies or persons by whom the levy will be payable''?
 If she did not do that, she would be in dereliction of her duty as Secretary of State. I am helping the Government by making an extremely reasonable suggestion. 
 Amendment No. 15 says that the Secretary of State 
''must take into account representations made to him by those bodies and persons''.
 As the Minister said, some representatives of those persons are already on the relevant body, but, as I explained, that is not of itself sufficient, although that is not to detract in any way from the eminence of those people. It would be better to put the amendment in the Bill. Again, if the Government did not take such representations into account in reaching their conclusions, they would be in dereliction of their duty. 
 Finally, the words of amendment No. 16 are 
''must not increase the rate of levy by more than 10% in any one year.''
 That, of course, is a different type of amendment. It would curtail the Government's ability to enable more to be charged to the private sector. I decided to go for a figure that is four times the rate of inflation.

Paul Farrelly: Under us!

David Taylor: Order.

Andrew Mitchell: The hon. Gentleman is quite right to correct me; it is four times the Bank of England target rate for inflation. It is not an unreasonable figure, given that the Minister says the Government have no intention of accepting the amendment. A cap of 10 per cent. seems extremely reasonable, yet the Minister summarily dismissed the arguments that I put on behalf of the business community.
 I am deeply dismayed. I have appealed fruitlessly to the old Labour instincts of Committee members; I now appeal to their new Labour instincts. After all, this is an opportunity for Labour to curry favour with the business community that it has so assiduously wooed and courted since 1992. Government Back Benchers 
 now have the opportunity to do exactly that, as I shall press the amendment to a Division. 
 Question put, That the amendment be made:—
The Committee divided: Ayes 1, Noes 9.

Question accordingly negatived. 
 Amendment proposed: No. 15, in 
clause 17, page 22, line 33, at end insert— 
 '(d) must take into account representations made to him by those bodies and persons.'.—[Mr. Andrew Mitchell.]
 Question put, That the amendment be made:—
The Committee divided: Ayes 1, Noes 9.

Question accordingly negatived. 
 Amendment proposed: No. 16, in 
clause 17, page 22, line 33, at end insert— 
 '(e) must not increase the rate of levy by more than 10% in any one year.'.—[Mr. Andrew Mitchell.]
 Question put, That the amendment be made:—
The Committee divided: Ayes 1, Noes 9.

Question accordingly negatived. 
 Clause 17 ordered to stand part of the Bill. 
 Clause 18 ordered to stand part of the Bill. 
 Further consideration adjourned.—[Mr. Watson.] 
 Adjourned accordingly at six minutes past Five o'clock till Thursday 16 September at five minutes to Nine o'clock.